Are personal injury settlements and awards part of your bankruptcy estate?

If you’re considering filing for bankruptcy, particularly a liquidation bankruptcy under Chapter 7, you are likely eager to understand exactly what property you will be able to hold onto throughout the process. One item you may not think about, but that can prove to be very important, is legal settlements/awards in a personal injury case. It may not occur to you that these could be forfeited in bankruptcy, but depending on your circumstances that is absolutely possible. To learn more about what happens to money won in a personal injury claim, keep reading.

Can you keep property in a bankruptcy?

First things first, let’s start by explaining that in a Chapter 7 bankruptcy debtors must sometimes give up items of personal property. The reason for this is that a Chapter 7 wipes out most, though not necessarily all, of your debt. One trick is that the bankruptcy trustee managing your case is able to sell property and use the money collected from the sale to distribute to your creditors. The goal is to ensure that you don’t unfairly benefit at the expense of your creditors, for instance, by getting to hold onto lots of valuable property while your creditors lose thousands of dollars.

Is a settlement or legal award property?

Any money, whether received as part of a settlement, an award under an arbitration proceeding or a judgment won at trial, is considered personal property. As personal property, it is thus considered part of your bankruptcy estate. This means that any money won related to a personal injury case can be forfeited in the event of a Chapter 7 bankruptcy. One exception that’s worth noting, if your injury occurred after filing for bankruptcy then anything awarded should be seen as separate from the bankruptcy estate. It’s only those claims existing prior to filing that should be included.

Do you have to give up everything?

The good news is that you don’t have to give up absolutely everything. After all, it wouldn’t be good for your financial future to be left penniless and without any assets to rebuild your life following the bankruptcy. Exactly what and how much you’re able to keep depends on the exemption laws governing your bankruptcy case. In some states, you can exempt next to nothing. In other states, debtors are allowed to exempt only money received due to a wrongful death claim. Yet other states say that you can only exempt the amount of money needed to support yourself and your family, anything above this amount can be taken and used to repay creditors.

At the federal level, those who file and win personal injury claims are entitled to exempt a little more than $23,000 in personal injury awards. That said, you are not allowed to exempt money awarded to cover financial losses such as medical bills. Under federal rules you are also able to exempt money for the loss of future earnings and money for wrongful death to the extent that the money is used to support yourself and your family.

What about North Carolina law?

Here in North Carolina, we have fairly generous exemption rules at least when it comes to personal injury awards. North Carolina law says that you are allowed to keep all money awarded in a wrongful death claim involving someone upon who you depended for support. For personal injury claims, you can also keep money awarded so long as it is specifically said to be compensating you for your personal injury. Any money meant to cover medical debts or for pain and suffering cannot be exempted and will be considered part of your bankruptcy estate.

If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.

About the Author

Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.

Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.

In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.